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Effects of Free Goods on Market Sustainability
Abstract
Various types of ‘bubbles', e.g. stock market, housing, dot.com, high-tech, historically, are commonly-observed phenomena in complex systems. Yet, their emergence often surprises people who remain unaware of history or their systemic roots. Bubbles are often considered to be simply the product of unwise speculative investments or social mania. Alternatively, conventional economic theories often consider factors, such as interest rates, to be the trigger. However, economic theories rarely account for the systemic structure of markets or for non-linear dynamics. The authors propose that special cases may emerge in some markets to trigger instability. Specifically, when minimal interest rates and capital requirements (down payments) are become extremely low a perceptual shift occurs among consumers such that they become viewed as approximate free goods. This paper proposes that unwise economic policies may activate a free goods scenario initiating a cascading series of destabilizing events leading to market collapse. The authors propose hypothesize that such incendiary policies caused both the 1929 stock market crash and the 2008 subprime housing crisis in the United States. To more deeply examine this claim, these policies were tested using a system dynamics model based on data from both the 1929 and 2008 crises. The model simulated and tested the effects of alternative rate policies on market dynamics. Some of the rates and down payments used in both crises set off tsunami-like shock waves through markets leading to their sudden collapse in these simulations. Based on the findings of this study, found that economic policies lessened market stability. The authors propose several revisions to these policies to foster greater market sustainability.
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